The WTO and Developing Countries: a Foreign policy in Focus Brief on WTO

By Aileen Kwa
Key Points

ท The agenda of the WTO, the implementation of its agreements and the much praised dispute settlement system advances the interests of developed countries, while those of the developing countries are being sidelined.

ท Least developed countries are marginalised in the world trade system and their products continue to face tariff escalations.

ท Rules uniformly applied to WTO Members have brought about inequalities because of their different circumstances and should be changed.

Overview

The World Trade Organisation (WTO) replaced the General Agreement on Tariffs and Trade (GATT) in 1995. Compared to the GATT, the WTO is much more powerful as it has a legal and institutional foundation, backed by a dispute settlement system. Countries which do not abide by the trade rules are taken to court and can eventually face retaliation.

The WTO was established to facilitate international trade, economic growth and development. The Preamble of the GATT 1947 states that ‘trade and economic endeavour should be conducted with a view to raising standards of living , ensuring full employment and a large and steadily growing volume of real income...’. These basic objectives were reinforced in the Marrakesh Agreement Establishing the WTO.

Historically, GATT has been enforcing phased-in tariff reductions world-wide. Its coverage was also limited to nonagricultural goods as the US, until the last Uruguay Round wanted to protect its agricultural sector. Over the years, as the corporate interests of the developed countries have expanded, developed countries have also pushed for more areas to be incorporated into the GATT/WTO. Its agenda now includes agriculture, services (financial, telecommunications, information technology etc.), intellectual property rights, electronic commerce, and possibly in the next round, investment, government procurement and competition policy.

Changes in rules come mainly through multilateral negotiations, called ‘rounds’. Rounds offer a ‘package’ approach to trade negotiations, where many issues are being negotiated together, and trade-offs between different issues can be made. The last of which was Uruguay and the next is likely to be called the Millennium Round, starting at the third WTO Ministerial Conference in December 1999. However, even between the Rounds, on-going negotiations on single issues take place. Although formally, decisions of the GATT and the WTO are made by all members, the reality is less democratic.

Today, the WTO has 132 Members with another 31 in the process of accession. 98 out of 132 Members are developing countries. 27 of the developing countries are classified as least-developed countries (LDCs), also the countries with the lowest incomes.

One of the commonly used yardsticks to measure the success of the WTO

is the volume of trade. The results seem excellent in this respect, with world trade up 25 per cent in the last four years and the exports of goods and services exceeding US$6.5 trillion in 1997.

Despite this, the results for developing countries have been at best mixed and in many cases damaging. While it sets out to be a democratic institution, the WTO is dominated by the leading industrialised countries and by the corporations of these countries. The logic of commercial trade drives the WTO. The development goals articulated when the GATT was first formed have been put aside, or are wrongly assumed to be the natural consequence of increased trade. The WTO at present is really mainly about fast track trade liberalisation in the sectors and products benefiting those with power in the institution.

Developing countries have little power within the WTO framework for the following reasons:

1) While developing countries make up two-thirds of WTO membership and by their vote can in theory influence the agenda and outcome of trade negotiations, the reality is that developing countries have never used this to their advantage. Most developing country economies are one way or another dependent on US, EU and Japan in terms of imports, exports, aid, security etc. They usually consider their obstruction of a consensus at the WTO too much of a threat to their overall well-being and security. Hence while many countries may be opposed to an agreement, as was the case with the Trade Related Intellectual Property Rights Agreement (TRIPS) concluded in the Uruguay Round, developing countries did not eventually obstruct its conclusion.

2) Trade negotiations are based on the principle of reciprocity or ‘trade-offs’. That is, one country gives a concession in an area, such as the lowering of tariffs for a certain product, in return for another country agreeing to sign on to a certain agreement. This type of bartering benefits the large and diversified economies since they can ‘get more by giving more’. Hence the disparity between those who can give and those who cannot, or only a little is increased. The stronger members accrue benefits, while the weaker ones have their interests sidelined. In fact, it is known in WTO circles that developing countries almost never barter for benefits, but usually relent to the requests of the developed countries. For the most part, negotiations and trade-offs take place between the developed countries, and some of the richer or larger developing countries.

2) Developing countries have fewer human and technical resources and therefore often enter negotiations less prepared then their developed country counterparts.

3) Developing countries have discovered that finding recourse in the dispute settlement system is costly and requires a level of legal expertise which they may not have. Furthermore, the basis on which the system is run - whether a country is violating free trade rules - is not the most appropriate for their development needs.

For most developing countries, WTO agreements bring negative consequences because they foreclose a wide range of development options. Through the agreements, governments give up their power to control their domestic economies and set their development priorities.

Some governments have called the WTO a ‘rich man’s exclusive club’.

Nelson Mandela, commenting on the Uruguay Round at the Second Ministerial Conference (May 1998) said

‘The developing countries were not able to ensure that the rules accommodated their realities...it was mainly the pre-occupations and problems of the advanced industrial economies that shaped the agreement’.

He went on to state that rules applied uniformly are not necessarily fair because of the different circumstances of members.

‘Where there are manifest inequalities when the rules are introduced then special and thoughtful measures have to be applied’.

The inequities within the WTO are stark. Exports from developing countries continue to face significant market access impediments. Recent studies by UNCTAD and the FAO have confirmed that tariff peaks and tariff escalation still hamper developing country exports and their attempts at export diversification.

Least developed countries (LDCs) have been worst-hit. While they make up 20 per cent of the world’s population, they are marginalised from trade flows, generating a mere 0.03 per cent share of world trade in 1997. LDC products face high tariffs and tariff escalations in products such as beef, cigarettes, clothing, footwear and wood

articles.

The work programme of the WTO since its inception has been similarly biased. Developing country members have been voicing grievances regarding implementation issues. Topping the list of their concerns include high levels of protection by the US and EU in textiles and clothing, agriculture, the implementation of the intellectual property rights agreement, US’ overuse of the transitional safeguard measures,

and the EU’s abuse of anti-dumping duties.

Unfortunately, issues of importance to developing countries have been sidestepped in the WTO’s agenda. Instead, the US has pushed members to ‘fast track’ the conclusion of new issues according to the emerging interests of US corporations. To gain market access in developing countries, they have succeeded, in record time, to finalise agreements in telecommunications, information technology, financial services and

the latest, a standstill on e-commerce (electronic commerce) tariffs. The Millennium Round talks scheduled to commence in late 1999 will push liberalisation in old and new issues even further, against the interests of developing countries.

Problems with Current US Policy

Key Problems

ท The US has unfairly implemented free trade principles only in sectors which benefit its economy. In other sectors, for example, textiles, protectionism reigns.

ท US agricultural and patenting policies will not meet the food needs of a growing world population.

ท Further liberalisation in selected issues, old and new, will give Northern corporations more access to the resources of the South, and damage the domestic economies of developing countries.

Of all the WTO members, the US is at the forefront, leading the organisation. Unfortunately, US leadership has more often meant US domination. Instead of looking out for the needs of WTO members, the US is concerned with aggressively expanding its own markets. It pursues a corporate-driven menu of liberalisation as much as politics will allow. As Martin Khor puts it, the US agenda is 'liberalisation if it benefits me, protectionism if it benefits me, what counts is my commercial interest'.

US has creatively interpreted WTO agreements to protect key industries. In textiles and clothing, the US has liberalised on items of little export value to developing countries or on items which were not protected in the first place. The US has also misused the transitional safeguard measures, that is, measures designed to protect domestic industries from sudden increases in imports. It has also introduced its own Rules of Origin (rules used to identify where a textile or clothing product comes from), changing the conditions of competition and adding to the restrictions against the products of low-cost textile exporting countries.

Similarly, due to creative calculations and interpretations of the Agreement on agriculture to reduce domestic support and open up its markets, the US only needed to make a few relatively insignificant changes to its policies to comply with its commitments under the Agreement. The Agreement therefore institutionalises subsidies to US agricultural producers while prohibiting developing country governments from introducing new forms of support. Under the Green Box policies,

direct income subsidies to US agricultural producers are exempted from reductions on

the specious grounds that they are ‘decoupled’ from production or are somehow ‘non-trade distorting’. In 1995, Green Box subsidies amounted to US$46 billion. This is over and above the US$6.2 billion on domestic subsidies the Agreement monitors (usually called Aggregate Measure of Support). The US 1996 Farm Bill has reduced direct payments to farmers, but has increased expenditure on export subsidies, hence benefiting US agribusinesses. These export subsidy initiatives are part of the US federal government’s 1996 stated export strategy to: ‘Increase the value of the United States agricultural exports each year at a faster rate than the rate of increase in the overall world export trade in agricultural products’.

US-led WTO agricultural policies will not meet the food needs of a growing world population. These policies promote food availability through trade, and discourage countries from being food self-sufficient. Most developing countries are short of foreign exchange and cannot afford to buy food from the world market despite

low pricing and availability. Food production has too many social and human implications and cannot be left of the vagaries of the market.

The Trade Related Intellectual Property Rights Agreement (TRIPS) fiercely protects the rights of corporations, such as the biotechnology industry, but allows the shared knowledge of indigenous communities to be patented by others. It is difficult for developing countries to protect their vast knowledge especially as much of the

knowledge is passed by word of mouth, a medium not recognised by US patent authorities as legitimate.

TRIPS provides the US biotechnology industry with the most conducive legal environment. However, biotechnology is not the answer to food shortage.

Genetically modified seeds and plants increase costs for farmers, promotes monocropping which increases the incidence of diseases and pests, encourages the use of chemicals and threatens the biodiversity and genetic purity of plant species.

Equally damaging is the inability of countries to protect their markets from genetically modified organisms (GMOs). Although the US has done little long-term research on the health impact of GMOs, other countries are unable to halt their import unless they come up with scientific proofs.

The US intends to introduce a broad spectrum of issues to the Millennium Round talks with the aim of enlarging the market for US goods, services and investments.

High on the agenda will be the controversial Multilateral Agreement on Investment, which seeks to gain national treatment and rights for their corporations operating in all countries. Small and medium sized enterprises in developing countries are unlikely to withstand such competition, a situation which would also lead to the destruction of

their domestic economy.

The US also intends to conclude an initial agreement on transparency in government procurement by the Third Ministerial Conference which will eventually bring about the full-scale opening of government procurement to foreign companies. Government procurement is a trillion dollar business. Like the investment agreement, this will be

detrimental for developing countries whose enterprises will not be ready for such intense competition. The right to build up the domestic economy will be pulled from under their feet.

It is precisely because the WTO is a multilateral avenue with an effective enforcement capability that US is putting an increasing number of issues under its auspices.

US President Clinton has repeatedly emphasised that trade is an important component of a set of policies aimed at raising living standards. But the question is higher standards for whom, when the path the WTO is currently taking - fast track liberalisation in an increasing number of issues - seems aimed at opening up new markets to the goods and services of US and the other industrialised countries.

Toward a New Foreign Policy

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Key Points

ท The WTO should put as top priority the development needs of its members.

ท Parts of agreements which work to disadvantage developing countries must be changed - agriculture, TRIPS, textiles and the dispute settlement system.

ท US’s leadership of the WTO should be reconsidered. Decision-making should be democratic and governments should consult regularly with the broader society on trade deliberations.

A radical change from a ‘trade creates wealth’ perspective to a development-centred perspective is necessary if trade is to bring about better living standards for all and long-term sustainability of resources. At present, the WTO’s brand of free trade has expanded the freedom and powers of transnational corporations but has severely

curtailed the interests of developing countries.

The WTO instead should emphasise greater self-sufficiency of economies nationally and regionally. Domestic markets, rather than foreign markets, should be the main stimulus of growth. Resources should be used sustainably to support local and national communities. People and the preservation of the environment, rather than capital, should be the priority.

For this to come about, a change in the leadership of the institution is absolutely necessary. Instead of having the US, EU and Japan at the helm, the WTO should be a democratic institution providing space for a plethora of voices. Governments should hold regular consultations with their people especially when negotiations are in process. Working documents and minutes of meetings must be readily available to the

public. Mechanisms must be set in place for civil society to participate in WTO decisions including making representations in the dispute settlement system.

The sovereignty of nations must be respected. Nations must be able to protect their domestic industries and laws. Countries must have the freedom to chose if they want overseas investments and what kind of investments. They must also be able to decide on their tariff rates and other trade barriers in order to protect their industries, as the

developed countries have been doing.

Because present rules, the work programme and the negotiation process all work in favour of developed countries, certain practices and rules in the WTO must be changed to incorporate the realities and broader development agenda of the Southern members.

All members should be enabled with the technical expertise and human resources to participate fully in the multilateral negotiations. Liberalisation on the ‘fast track’ must be stopped. Instead changes should be made to rules which effectively disadvantage the economies of developing countries.

Decision-making in the WTO must also involve all members. This has not been the case to date, where the ‘quad’ (US, EU, Japan and Canada) made many decisions on behalf of all.

The dispute settlement system must take into consideration the development needs of countries, not just whether free trade rules have been violated. For instance, the recent ‘Banana Dispute’ saw the WTO ruling in favour of the US over the EU’s traditional arrangement of preferential access to the Caribbean banana exporting countries. This

will lead to a big squeeze on the Caribbean’s market share and bring about economic devastation, especially in the small economies which depend solely on banana exports. The dispute system must instead ensure the development needs especially of vulnerable economies. In the area of agriculture, countries should be able to choose to be self-sufficient. If developed and developing country farmers are to compete in the same markets, then the $280 billion in subsidies OECD countries provide in a year to their farmers should be reduced to the negligible amounts developing countries provide. Otherwise, developing countries should be allowed to increase their subsidies as well as to increase their tariffs in order to protect their markets from the highly subsidised exports of the developed countries. Small farms in both developed and developing countries should be encouraged, not squeezed out, especially in developing countries where farming is the source of livelihood for millions.

TRIPS, which allows the theft of indigenous knowledge, should be changed so that patent rights are not granted for naturally occurring plants and animals or their parts, or the uses of plants and animals. There should also be an easy mechanism for developing countries to find out about the applications for patents for naturally

occurring materials, their uses or their transgenic forms.

Extensive and long-term research on the impact of transgenic foods on the health of consumers as well as the possibility of bio-pollution on other plants must be carried out before genetically transformed plants and animals are allowed to be patented.

TRIPS should be amended so that it reinforces, not contradicts, the principles of the Convention on Biodiversity. Genetically transformed plants and animals must not be covered by patent rights.

If developing countries are still forced down the path of rapid liberalisation, the in textiles, the US must give up taking recourse in technicalities and implement real liberalisation immediately.

Developed countries should eliminate the tariff escalation on product chains of interest to developing countries.

In services, the subject of the movement of labour should be continued with the aim of arriving at an agreement for significant liberalisation in this sector.

The WTO should work together with the relevant UN agencies and use the international standards established in the UN conventions to ensure that development goals are in concert with the trade agenda.

The final test of the WTO’s success is not the amount of trade flows or how much trade barriers have been lowered, but whether and to what extent the living standards of all, particularly the developing countries - also two-thirds of its members - are improving.